New HALs to offer homeowners potential interest-free mortgage

Nation's Housing

IF YOU COULD borrow $30,000 or $40,000 at zero percent interest, never make monthly payments, and not have to pay the money back until you moved or sold your house, would you do it?

Sound too good to be true? Well, it is. And it isn't.

This year, American homeowners are scheduled to be offered a mortgage concept for the first time that is based primarily on equity appreciation, not on interest. Dubbed the "home appreciation loan" or HAL, the new mortgage is aimed squarely at owners in their late 40s and 50s, who could use cash for big expenses such as children's college tuitions and weddings, but who don't want to take out a home equity loan or credit line because of the interest charges.

The HAL would instead offer them interest-free or low interest-rate cash in exchange for a percentage share of their property's future appreciation. As a hypothetical example, say you wanted to borrow $40,000. In exchange for an agreed-on share of your future appreciation -- not your current equity in the house -- you'd get the money at a zero interest rate or could negotiate an interest rate from 3 percent to 7 percent.

You'd pay nothing back to the lender until you sold the house. Your payback amount would be the principal you originally borrowed, plus accrued interest, if any. On top of that, you'd owe whatever equity share you chose when you closed the loan.

If your house was worth $200,000 on the date you took out your HAL, and eight years later sold for $240,000, you'd pay whatever percentage of the $40,000 you agreed to share up front. If you chose a 50 percent share, that would come to $20,000, and would be paid from the sale proceeds.

What if your net appreciation turned out to be zero -- or negative -- and you signed up for a zero percent interest HAL? Then you'd owe the $40,000 balance. Because no interest was charged, and there was no appreciation to share, you would have enjoyed that rarest of loans -- a true interest-free mortgage.

But isn't zero appreciation highly unlikely? Yes, but that's precisely what occurred in 16 of the nation's major housing markets -- including Los Angeles, New Haven, Conn., and Albany, N.Y. -- during the 1990s, one of the strongest home appreciation decades in American history. If historical patterns hold, most homes would experience at least modest appreciation in resale value in the years to come. That's why the Wall Street and mortgage industry designers of the HAL program feel confident about offering low- or no-interest, no-monthly-payment loans tied to appreciation shares.

One of the architects, Lehman Brothers Inc., the New York investment banking firm, helped create a similar program in the United Kingdom. Lehman's role in the American version would be to connect HALs to the global capital markets by pooling hundreds of loans and selling bonds against them.

The primary mortgage company involved in the program, Financial Freedom Senior Funding Corp. of Irvine, Calif., specializes in reverse mortgages for seniors 62 and older. Like the HAL concept, reverse mortgages require homeowners to repay what they've borrowed only when they sell the house, move out, or die. Increasingly recognized by seniors as a smart way to supplement their retirement incomes while still living in their home, reverse mortgages are expected to grow rapidly in popularity in the coming decade as baby boomers begin entering their 60s.

The HAL plan essentially modifies the reverse mortgage concept and serves it up to younger homeowners. Though Lehman and Financial Freedom officials stress that the specific terms of the new home loans are still in final development, the program would likely have these features:

Homeowners would be able to choose from a wide variety of permutations of loan amounts, interest rates and equity shares. In general, the lower the interest rate you choose, the higher the future appreciation percentage you'll be asked to share.

HALs might come with credit-line features, allowing homeowners to borrow money periodically with little or no accrued interest charges. They also might be eligible for refinancing into reverse mortgages. A 50-year-old could take out a $40,000 HAL this year, pay nothing until he or she is 62, and then roll the debt into a reverse mortgage that's not due or payable during the homeowner's lifetime.